Union Pacific has reached an agreement with Canadian National, securing that railroad’s backing for its proposed $85 billion purchase of Norfolk Southern — a deal that would reshape the American freight rail industry.
If approved, the merger would create the country’s first transcontinental railroad. However, the proposal has sparked sharp disagreement across the industry, largely because it would place more than 40% of all U.S. rail traffic under the control of a single company, reducing the number of major freight railroads in the country to five. Railroads BNSF, CPKC, and CSX have all come out firmly against the deal. Canadian National, however, reversed course and announced its support after negotiating concessions from Union Pacific.
The U.S. Surface Transportation Board has begun its review of the proposed merger but has asked both railroads to provide additional information before the process can move forward — with a deadline set for the end of the month. Companies that ship goods have taken different sides on the issue. Some are eager about the potential for faster coast-to-coast deliveries, while others — particularly those in the chemical and agriculture sectors — fear the merger could lead to higher shipping costs and service disruptions.
Union Pacific CEO Jim Vena explained that the arrangement with Canadian National is designed to ease concerns about reduced competition. Under the terms, Canadian National would be allowed to serve any customers who would otherwise lose significant shipping options as a result of the merger. Canadian National would also take over Norfolk Southern’s ownership stakes in smaller railroads operating in St. Louis and Kansas City, preventing the combined railroad from ever controlling the majority of those operations.
“This is truly more compelling today than we ever looked at it before,” Vena said Thursday while discussing Union Pacific’s second-quarter earnings results. “We think we have a strong case.”
As part of the agreement, Canadian National would gain access to rail lines running between St. Louis and Kansas City, as well as a key rail yard in Kansas City — moves that would strengthen its ability to compete for freight business moving to and from Mexico. In return, Union Pacific would gain greater flexibility to route traffic around heavily congested rail lines in Chicago.
“As the rail industry considers significant structural change, it is essential that customers continue to benefit from meaningful competition and choice,” said Canadian National President and CEO Tracy Robinson.
The Surface Transportation Board will evaluate the proposed merger under a rigorous set of rules it put in place in 2001, following a wave of rail consolidations in the 1990s that caused shipping delays lasting weeks or even months. Under these untested standards, any merger involving the six largest railroads must be demonstrated to serve the public interest and improve competition. The board applied a less demanding standard three years ago when it approved the first major rail merger in more than two decades — Canadian Pacific’s $31 billion acquisition of Kansas City Southern.
